annual management report of fund performance/media/... · the fund’s high yield debt holdings in...

2013Annual Management Report of Fund Performance

For the period from January 1, 2013 to December 31, 2013

New Hor izons Master Fund

Brookfield Investment Management

New Horizons Master Fund

2013 Annual Management Report of Fund Performance | 1

In Profile

New Horizons Master Fund (the “Fund”) is managed by Brookfield InvestmentManagement (Canada) Inc. (“BIM Canada”). BIM Canada is a subsidiary of BrookfieldAsset Management Inc., a global alternative asset manager with greater than US$187billion of assets under management as at December 31, 2013 and over a 100-yearhistory of owning and operating assets with a focus on property, renewable power,infrastructure and private equity.

BIM Canada is also the investment manager of the Fund.



MANAGEMENT REPORT OF FUND PERFORMANCE

This annual management report of fund performance contains financial highlights but does not containthe complete annual financial statements of the Fund. The annual financial statements may containinformation not included in the management report of fund performance. You can get a copy of theannual financial statements at your request, and at no cost, by contacting us (see contact informationat end of this report) or by visiting our website at www.brookfieldim.com or by viewing our filings onSEDAR at www.sedar.com. Unitholders may also contact us to request a free copy of the Fund’s interimfinancial report, proxy voting policies and procedures, proxy voting disclosure record, or quarterlyportfolio disclosure.

This report may contain forward-looking statements. The use of any of the words anticipate, may, will,expect, estimate, should, believe and similar expressions are intended to identify forward-lookingstatements. Such statements reflect the opinion of Brookfield Investment Management (Canada) Inc.(“Investment Manager” or “BIM Canada”) regarding factors that might be reasonably expected to affectthe performance and the distribution on units of the Fund and are based on information available atthe time of writing. The Investment Manager believes that the expectations reflected in these forward-looking statements and in the report are reasonable but no assurance can be given that theseexpectations or the report will prove to be correct and accordingly, they should not be unduly reliedon. These statements speak only as at the date of the report. Actual events and outcomes may differmaterially from those described in these forward-looking statements or report.

Unless otherwise indicated, all information is presented as at December 31, 2013 and in Canadiandollars.

None of the websites referred to in this annual management report of fund performance, nor any ofthe information on such websites, are incorporated by reference in this annual management report offund performance.

Investment Objectives and Strategies

The New Horizons Master Fund (the “Fund”) is an investment fund created to invest in a portfolio ofsecurities (the “Portfolio”) that focuses on, but is not limited to, investments in high yield corporatedebt, and publicly-listed securities in infrastructure and real estate companies across a global universe.BIM Canada is the manager (the “Manager”) of the Fund. The investment objective of the Fund is toprovide holders of the units (the “Units”) with the opportunity to preserve the net asset value of theFund.

Risk

At December 31, 2013, the Portfolio was primarily invested in high yield fixed income securities ofcompanies domiciled in the United States and to a lesser extent, Canada and Brazil. In addition, thePortfolio has a growing weighting in high yielding equities which represented approximately 26% of thePortfolio holdings as at December 31, 2013. The Portfolio holdings are exposed to various risksincluding risks related to the credit quality of the issuer of the securities, the trading liquidity of thesecurities and the currency in which the securities are denominated. The Fund seeks to minimizepotentially adverse effects of these risks on the Portfolio’s performance by employing experiencedportfolio managers and by continuously monitoring the Portfolio’s investments and markets. Over theyear ended December 31, 2013 there was no material change in the overall level of risk created by thecredit quality, trading liquidity or currency denomination of the investments employed by the Fund.

During the period ended December 31, 2013, the Fund had exposure to derivatives through forwardcurrency contracts and equity total return swaps. The Investment Manager seeks to mitigate thecounterparty risk arising from such arrangements through the careful selection of its derivative



contract counterparties. As at December 31, 2013 the Fund held two positions through equity totalreturn swaps representing $7.39 million of gross exposure and had no forward currency contracts inplace.

In the fourth quarter of 2011, the Fund began to use leverage to finance the purchase of certaininvestments. The introduction of indebtedness in the Fund represented a material change in theoverall level of risk employed by the Fund. Leverage in the Fund is restricted to 25.00% of the totalassets of the Fund. Accordingly, at the time of borrowing, the maximum amount of leverage thatthe Fund could employ is 1.33:1 (total long positions, including leveraged positions, divided by netassets of the Fund). At December 31, 2013, the Fund had employed leverage equal to 18.90%(December 31, 2012 – 1.67%) of the net assets of the Fund, equating to $31.6 million (December 31,2012 - $2.4 million) which includes both margin payable and leverage obtained through equity totalreturn swaps.

Results of Operations

The Fund’s net asset value was $167.3 million as at December 31, 2013, an increase of $25.1 millionfrom $142.2 million as at December 31, 2012. The increase in net asset value was largely comprised ofnet investment income of $13.0 million plus net realized and unrealized investment gains ofapproximately $24.0 million (including currency gains of approximately $9.6 million). These gains werepartially offset by the redemption of 857,926 Units for $11.9 million.

As at December 31, 2013, the net asset value per Unit of the Fund was $16.07 compared to $12.62 onDecember 31, 2012. The Fund’s total return was 27.39% for the year ended December 31, 2013.

The Fund’s total return of 27.39% over the period was primarily driven by: (1) investment incomeearned in the portfolio, (2) price changes in individual holdings of the Portfolio, and (3) the positiveimpact of currency translation.

While the Fund does not have a specific benchmark index due to its ability to obtain exposure to avariety of asset classes, the Portfolio, throughout the year ended December 31, 2013, was comprisedprimarily of high yielding fixed income securities and select high yielding equities. The performance ofthe Merrill Lynch Global High Yield Index helps to explain general trends in high yielding corporatecredit. For the year ended December 31, 2013, the corporate high yield debt market, as measured bythe Merrill Lynch Global High Yield Index, had a total return of 15.20% in Canadian dollar terms. Theindex return was comprised of a -0.25% impact from price decreases, coupon payments of 7.31% and apositive impact of 8.14% from the weakening of the Canadian dollar. The Portfolio had a greaterweighting in issuers that had a lower average credit quality than this index. Lower credit quality issuesgenerally outperformed the index due to higher yield and positive price performance.

Global capital market performance during the Period was quite volatile, as positive performance in thebeginning of the year was followed by a period of enhanced investor anxiety and ultimately a strongrally into the year-end. Overall confidence was buoyed in the first quarter by ongoing global liquidity,continued signs of stabilization in Europe and modest growth within the U.S. economy. However,investor sentiment reversed significantly following indications that the Federal Reserve would begin totaper monetary stimulus later in the year and as Congress battled over debt ceiling issues, causinginterest rates to spike and capital markets to soften. However, once the markets digested the impactof tapering and stronger economic data began to emerge out of the US, equities resumed an upwardtrajectory.

In addition to the high income return on securities within the Portfolio, there were several single nameoutperformers in the Portfolio. The Fund’s high yield debt holdings in North American Energy Partnersbenefitted from a redemption at a premium to market price. MBIA Corp. benefited from anadvantageous legal settlement achieved by the company. Improving recovery prospects for EdisonMission Energy caused its Senior Unsecured bonds to rally significantly. Also of note was our holdings in



SuperMedia Inc.’s term loan which benefitted from anticipated expense savings resulting from theclosing of its merger with Dex Media Inc. Lastly, the Portfolio’s holdings in higher beta names such asForbes Energy Services and First Data Corporation experienced strong market price appreciation. Theseevents were important contributors to the Portfolio’s performance. Weak thermal coal prices droveunder performance in our high yield holdings in Arch Coal.

The equity portion of the Portfolio also had some notable outperformers. In particular the Fund’sholdings in AGF Management Ltd. and Sun Life Financial Inc. benefitted from their sensitivity to strongequity market performance. One relative underperformer in the Portfolio was EV Energy Partnerswhich experienced modest price declines.

The Fund is exposed to currency risk as the Units of the Fund are denominated in Canadian dollars andthe investments in the Portfolio may be in currencies other than the Canadian dollar. The InvestmentManager may hedge such currency exposures from time to time. As at December 31, 2013 the Portfoliohad no such hedges in place. However, during the year ended December 31, 2013 the Fund had inplace forward currency swaps. During the year ended December 31, 2013 the Canadian dollar droppedin value relative to the U.S. dollar from 1.0079 CAD/USD to 0.9414 CAD/USD. The weakness in theCanadian dollar relative to the U.S dollar, netted with the currency hedging activities undertaken bythe Fund, had a positive impact on the Portfolio with realized and unrealized foreign exchange gains ofapproximately $9.6 million for the year ended December 31, 2013. This tailwind added approximately6.8% to the Fund’s total return during the Period.

Leverage is restricted to 25.00% of the total assets of the Fund. Accordingly, at the time of borrowing,the maximum amount of leverage that the Fund could employ is 1.33:1 (total long positions, includingleveraged positions, divided by net assets of the Fund). At December 31, 2013, the Fund had employedleverage equal to 18.90% (December 31, 2012 – 1.67%) of the net assets of the Fund, equating to $31.6million (December 31, 2012 - $2.4 million) which includes both margin payable and leverage obtainedthrough derivatives. The minimum and maximum amounts of borrowings outstanding during the twelvemonth period ended December 31, 2013 were $2.3 million and $36.4 million, respectively. Theminimum and maximum amounts of borrowings outstanding during the year-ended December 31, 2012were $0 and $23.8 million, respectively. The borrowings were used to grow the Fund’s investments andfor working capital needs. Adding leverage to the Fund is consistent with the Fund’s objectives.

Recent Developments

Consistent with the Investment Manager’s strategy, the Portfolio is focused on, but not limited to,investments in high yield corporate debt and publicly-listed securities in infrastructure and real estatecompanies across a global universe. Allocations across these asset classes are based on trends and riskand return expectations, and the Investment Manager’s assessment of the macro-economicenvironment and investment landscape. At the current time, of the three focus asset classes, theInvestment Manager believes that equities are becoming increasingly attractive relative to high yieldcorporate debt. We intend to continue to take profits as appropriate in our high yield debt positionsand redeploy capital into other high yielding securities that have attractive risk-reward characteristics.

Change of TrusteePursuant to the terms of the declaration of trust, BIM Canada replaced Caledon Trust Company astrustee of the Fund effective June 1, 2013. BIM Canada does not receive any fees for providing thisservice.

Future Accounting Changes

International Financial Reporting Standards (“IFRS”) replaced Canadian GAAP for publicly accountableenterprises, other than investment funds. Under the general transition rules for publicly accountableenterprises other than investment funds, publicly accountable enterprises adopted IFRS for the fiscalperiod beginning January 1, 2011.



On September 7, 2010, the Canadian Accounting Standards Board ("AcSB") approved an optional oneyear deferral of IFRS adoption for investment companies applying Accounting Guideline AcG 18,Investment Companies until fiscal years beginning on or after January 1, 2012. On January 12, 2011,the AcSB approved an additional one year extension to the optional one year deferral until fiscal yearsbeginning on or after January 1, 2013 and in December 2011, was further extended to January 1, 2014.Accordingly, the Fund will adopt IFRS no later than for the fiscal year beginning January 1, 2014, andwill issue its initial financial statements in accordance with IFRS, including comparative information, nolater than for the period ending June 30, 2014. At this point in the transition from GAAP to IFRS, theFund anticipates that there will not be a material impact to the Net Assets per Unit. The impact of IFRSon accounting policies and implementation decisions will mainly be in the areas of additional notedisclosures in the financial statements.

Related Party Transactions

The Manager is a wholly owned subsidiary of Brookfield Asset Management Inc. (“Brookfield”) and itmanages the investment and trading activities of the Fund pursuant to a management agreement. Dueto Brookfield’s ability to control the Fund, Brookfield, and its affiliates over which it has the ability toexercise control or significant influence, are related parties of the Fund by virtue of common control orcommon significant influence.

Transactions with related parties, including investment transactions, are conducted in the normalcourse of operations and are recorded at exchange amounts, which are equivalent to normal marketterms. Please refer to the section titled “Management Fees”, which outlines the fees paid to theManager by the Fund.

The Fund entered into an agreement dated March 1, 2011 with three entities, two of which wererelated parties of the Fund (the “Exchange Option Purchasers”) due to common control. Each of theExchange Option Purchasers agreed to sell to the Fund on April 1, 2011 (the “Closing Date”), a portfolioof securities (the “Exchange Option Securities”). The Investment Manager determined that theExchange Option Securities complied with the Fund’s investment restrictions that owning suchsecurities was consistent with the Fund’s investment objectives and that acquiring these securities onthis basis was in the best interest of the Fund. The Manager sought the approval of the Fund’sIndependent Review Committee (the “IRC”) on the pricing mechanism that would be used to value theExchange Option Securities. The IRC provided its approval on the Manager’s recommendation. Thetransaction was effected at the market price of the Exchange Option Securities on the day before theClosing Date (Closing Date being April 1, 2011). The total value of the Exchange Option Securities was$103.6 million.

There were no other transactions conducted with related parties during the twelve month periodended December 31, 2013 and the twelve month period ended December 31, 2012.



Financial Highlights

The following tables provide selected financial information about the Fund and are intended to helpyou understand the Fund’s performance since inception:

For the twelvemonths ended


For the ninemonths ended

The Fund’s Net Assets per Unit(1) December 31, 2013 December 31, 2012 December 31, 2011(2)

Net assets, beginning of period(3) $12.62 $9.88 $10.00

Increase (decrease) from operations

Total revenue $1.30 $1.25 $0.77

Total expenses (0.09) (0.07) (0.04)

Realized gains (losses) for the period 1.13 0.28 0.02

Unrealized gains (losses) for the period 1.11 1.28 (0.89)

Total increase (decrease) fromoperations $3.45 $2.74 ($0.14)

Net assets, end of period(4)(5) $16.07 $12.62 $9.88

Notes:(1) This information is derived from the Fund’s audited annual financial statements. The net assets per Unit presented in theFund’s financial statements may differ from the net asset value calculated for fund pricing purposes. An explanation of thesedifferences can be found in the notes to the Fund’s financial statements.(2) Results are for the period from April 1, 2011 (the inception date of the Fund) to December 31, 2011.(3) The beginning of period net assets per Unit in 2011 reflects the issue price of $10.00.(4) Net assets and distributions are based on the actual number of Units outstanding at the relevant time. Theincrease/decrease from operations is based on the weighted average number of Units outstanding over the financial period.Accordingly, totals may not sum in the above table due to the different basis for computing the per unit amounts.(5) This is not a reconciliation of the beginning and ending net assets per Unit.



For the ninemonths ended

Ratios and Supplemental Data December 31, 2013 December 31, 2012 December 31, 2011(2)

Total net asset value(1) $167,296,460 $142,182,310 $121,545,454

Number of Units outstanding 10,410,885 11,268,811 12,303,740

Management expense ratio(3) 0.55% 0.56% 0.47%

Management expense ratio beforewaivers and absorptions(3) 0.55% 0.56% 0.47%

Trading expense ratio(4) 0.06% 0.04% --

Portfolio turnover rate(5) 52.08% 36.09% 39.45%

Net asset value per Unit $16.07 $12.62 $9.88



Notes:(1) This information is provided as at December 31, 2013, December 31, 2012 and December 31, 2011. The net asset valuecalculated for fund pricing purposes may differ from the net assets per Unit presented in the Fund’s financial statements. Anexplanation of these differences can be found in the notes to the Fund’s financial statements.(2) Results are for the period from April 1, 2011 (the inception date of the Fund) to December 31, 2011.(3) Management expense ratio (“MER”) is based on total expenses (excluding commissions and other portfolio transaction costsbut including interest expense) for the stated period, and is expressed as an annualized percentage of daily average net assetvalue during the period.(4) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualizedpercentage of daily average net asset value during the period.(5) The Fund’s portfolio turnover rate indicates how actively the Fund’s portfolio adviser manages its portfolio investments. Aportfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in thecourse of the year. The higher a fund’s portfolio turn-over rate in a year, the greater the trading costs payable by the fund inthe year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily arelationship between a high turnover rate and the performance of a fund.

Management Fees

The Manager is responsible for providing or arranging for all investment advisory and portfoliomanagement services required by the Fund including, without limitation, managing the Portfolio in amanner consistent with the investment objectives, guidelines and restrictions of the Fund and forarranging for the execution of all portfolio transactions. The Manager is also responsible for theoperational and administrative functions of the Fund. As compensation for the management servicesrendered to the Fund, the Manager is entitled to receive an annual management fee of 0.30% of thenet asset value of the Fund. The management fee is calculated daily and payable monthly in arrears,plus applicable taxes and totalled $527,060 and $448,443 for the twelve months ended December 31,2013 and 2012, respectively.

Past Performance

Note that the performance information shown in this section assumes that all distributions made by theFund in the period shown were reinvested in additional Units of the Fund. Also note that theperformance information does not take into account sales, redemption, distribution or other optionalcharges that would have reduced returns on performance. The performance of the Fund in the pastdoes not necessarily indicate how it will perform in the future.



Year-by-Year Returns

The bar chart below shows the Fund’s performance for the periods shown. The bar chart shows, inpercentage terms, how much an investment made on the first day of the period would have grown ordecreased by the last day of the period.

Notes:(1) Represents period from April 1, 2011 (the Fund’s inception date) to December 31, 2011.(2) Represents period from January 1, 2012 to December 31, 2012.(3) Represents period from January 1, 2013 to December 31, 2013.

Annual Compound Returns

As the Fund’s investment strategy is to seek attractive income opportunities with a focus on, but nolimitation to, investments in high yield corporate debt, and publicly-listed securities in infrastructureand real estate companies across a global universe, the Investment Manager has decided to replace theappropriate broad-based securities market indices with the S&P/TSX Composite Total Return Index andthe DEX Universe Bond Index. In the Investment Manager’s view, the new indices are a bettercomparison to the Fund’s investment strategy and will provide Unitholders with a more familiar andappropriate set of comparative indices upon which to judge performance. The S&P/TSX CompositeTotal Return Index is a broad equity market proxy and DEX Universe Bond Index is a broad measure ofthe Canadian investment-grade fixed income market. The Investment Manager believes that the indicesthat were used previously are more suited to an investment strategy with a total return emphasis thatis specifically constrained to the high yield corporate debt, and publicly-listed securities ininfrastructure and real estate asset classes, rather than an investment strategy with an emphasis onincome generation.

The following table shows the Fund’s compound returns, based on published net asset values, for theperiods noted and the annual compound returns, based on net asset values since inception, in Canadiandollar terms. These returns are compared to the returns of indices that the Investment Manageroriginally used for performance comparisons. The returns of the indices are presented for the sameperiods as the Fund and in Canadian dollar terms.

-1.21%

27.69% 27.39%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

12/31/2011 12/31/2012 12/31/2013(1) (2) (3)



2013(1) 2012(2) 2011(3)Since

Inception(4)

% % % %

New Horizons Master Fund 27.39 27.69 (1.21) 18.78

DEX Universe Bond Index (1.21) 3.60 9.97 4.39

S&P/TSX Composite Index 12.99 7.19 (13.55) 1.69

Notes:

(1) For the twelve months ended December 31, 2013

(2) For the twelve months ended December 31, 2012(3) For the period from April 1, 2011 to December 31, 2011(4) For the period from April 1, 2011 to December 31, 2013, annualized

The following table shows the Fund’s compound returns, based on published net asset values, for theperiods noted and the annual compound returns, based on net asset values, since inception, inCanadian dollar terms. These returns are compared to the returns of indices that the InvestmentManager originally used for performance comparisons. The returns of the indices are presented for thesame periods as the Fund and in Canadian dollar terms.

2013(1) 2012(2) 2011(3)Since

Inception(4)

% % % %

New Horizons Master Fund 27.39 27.69 (1.21) 18.78

Merrill Global High Yield Index 15.20 16.66 2.45 12.33

Dow Jones Brookfield Global Infrastructure Total Return Index 23.79 13.54 11.48 17.74

FTSE EPRA/NAREIT Developed Index 11.51 26.36 (4.45) 11.39

Notes:

(1) For the twelve months ended December 31, 2013

(2) For the twelve months ended December 31, 2012(3) For the period from April 1, 2011 to December 31, 2011(4) For the period from April 1, 2011 to December 31, 2013, annualized



Summary of Investment Portfolio

The following is a summary of the Fund’s Portfolio as at December 31, 2013. This is a summary only andwill change due to ongoing portfolio transactions of the Fund. Quarterly updates will be posted towww.brookfieldim.com.

As at December 31, 2013 % of Net AssetValue of the FundTop 25 Holdings

First Data Corp. Bonds 8.04MBIA Inc. Bonds 7.91Beazer Homes USA, Inc. Bonds 6.40BlackBerry Ltd. Bonds 6.35Forbes Energy Services Ltd. Bonds 6.22Arch Coal Inc. Bonds 6.17Lightstream Resources Ltd. Bonds 5.76SuperMedia Inc. Bonds 5.30AGF Management Ltd. Equity 5.26Man Group PLC Equity 5.06Banco Do Brasil S.A. Bonds 4.88Sun Life Financial Inc. Equity 4.29Hexion US Finance Corp. Bonds 3.80Canadian Oil Sands Ltd. Equity 3.70Calfrac Holdings LP Bonds 3.65Edison Mission Energy Bonds 3.61Unilever PLC Equity 3.39Walter Energy Inc. Bonds 3.35BP PLC Equity 3.19GP Investments Ltd. Bonds 2.86North American Energy Partners Inc. Bonds 2.82Cash and cash equivalents 2.56Just Energy Group Inc. Bonds 2.41Texas Competitive Electric Holdings LLC Bonds 2.32K Hovnanian Enterprises Inc. Bonds 2.09Total 111.39

*The Fund has notional exposure resulting from derivatives representing 4.69% of NAV.



As at December 31, 2013 % of Net Asset Value

Sector Allocation of the Fund

Banking 4.88

Basic Industry 13.32

Consumer, Non-Cyclical 3.39

Energy 29.53

Finance & Investment 13.18

Insurance 13.73

Media 5.30

Services Cyclical 8.49

Technology & Electronics 14.40

Utility 6.45

Cash and cash equivalents 2.56

Other Liabilities and Accrued Investment Income (15.23)

Total 100.00

*The Fund has notional exposure resulting from derivatives that would increase the Banking and Energy sectors by1.77% and 2.92% of NAV, respectively.



FUND INFORMATION

MANAGER AND INVESTMENT MANAGER

Brookfield Investment Management (Canada) Inc.George E. MyhalDirector, President & Chief Executive Officer

Jonathan TyrasManaging Director, Chief Financial Officer,and General Counsel

Gail CecilDirector, Managing Director

Craig NobleDirector

INDEPENDENT REVIEW COMMITTEE

John P. Barratt (Chair)Corporate Director

James L. R. KellyPresidentEarth Power Inc.

Frank LochanCorporate Director

CONTACT INFORMATION

New Horizons Master Fund welcomes inquiries from Unitholders, analysts, media representatives orother interested parties.

Manager, Investment Manager, Transfer Agent, Registrar, and Trustee

Unitholder inquiries relating to distributions, address changes and Unitholder accountinformation should be directed to the Fund’s Transfer Agent:

Brookfield Investment Management (Canada) Inc.

Brookfield Place

181 Bay Street, Suite 300

Toronto, Ontario

M5J 2T3

t. 416.363.9491

w. www.brookfieldim.com

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